the intersection of sports, economics, management, and strategy

Lessons from Los Angeles: Reinventing the Olympic Ring$

The Olympics are again broken, cursed by economic fallacies relating to crowding out, shortsightedness, and the winner’s curse. Yet given the global demand for Olympic viewing, a new kind of corporate politics may provide the answer, albeit an unpopular one.

The growing revelation that bringing the Olympic torch to town ignites skyrocketing public costs in exchange for a two-week circus is not new. The 1984 Games of the XXIII Olympiad—the most financially successful Olympics ever—went to Los Angeles because literally no one else wanted them. Tehran, the only other city in the world to even bid for those games, withdrew from consideration.

How could such lackluster interest produce the most successful Olympics ever? Precisely because the city appreciated the economics of public finance, had substantial existing facilities, and did not fudge the numbers in order to win the bid.

Generally, crowding out refers to the propensity for government spending—particularly tax dollars and loans—to replace, rather than supplement, private spending. A government collects $1 and puts on the Olympics, returning $2 in revenue. Terrific! Except that $1 is no longer available to the private sector, where it may have returned $3 or even $4. Study after economic study suggests that the Olympics induce crowding out. In 1984, however, Los Angeles privately funded the games. By now the six words seem as natural as the five rings, but Los Angeles only introduced them 31 years ago: “Official sponsor of the Olympic Games”.

Additionally, Los Angeles refrained from building even one new facility to host. The monstrous, newfangled venues of today are magnificent for two weeks (if they are finished), then rendered useless tracts of concrete. NFL stadiums are used a minimum of 10 times a year, for decades, and those built since 2004 have cost about $900 million each in 2014 US Dollars. Yet recentOlympicStadiums have cost roughly $500 million, despite being doomed to hit full capacity a scant 16 times, if that. By modestly upgrading existing facilities, Los Angeles organizers did not overreach, nor overvalue the present.

Lastly, consider the winner’s curse, the economic idea that the winner in an auction likely overpays, being by definition willing to pay more than any other bidder. Seoul, Barcelona, Atlanta, Sydney, Athens, Beijing, etc…did these cities truly stand to gain more from hosting the Olympics than those they outbid? Economist Evan Osborne notes: “When multiple cities bid, each has a different view of what the revenues will be, and the one with the brightest economic forecast usually wins.” When the torch leaves and the foolish forecast fails, cities are left footing the bill. Los Angeles’ relatively unenthusiastic acceptance of the 1984 games put the city in position to embrace the economic realities from Day 1—and chase corporate dollars accordingly—rather than delude themselves with fictional returns and false hopes for the best.

Los Angeles was different. And so must the next host city be to succeed. The next games must disrupt the status quo. This may mean pushing to larger, established cities with infrastructure in place. This may mean hunting for more sponsors and offering more advertising. Perhaps that seems against the Olympic spirit, but it seems the only way to keep the games viable. As Boston’s reluctance shows, the current system is broken. A change is gonna’ come.